[Viewpoint] Gold is the canary in the coal mine

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[Viewpoint] Gold is the canary in the coal mine

If Group of 20 officials want evidence they achieved little in Seoul, it’s the price of gold.

Gold mocked hopes for a solution to global imbalances in recent months, on its way to new highs. With the $1,400 per ounce mark under its belt, gold was shooting for the next milestone: $1,500.

Now, commodities, which fell the most in 18 months on Friday, are dissing the G-20 in a different way. Gold slid to $1,365.50, just days after hitting a record $1,424.30 on Nov. 9. Why? Fears of overheating in China. Hot money is already wreaking havoc with Asian asset prices. The Federal Reserve’s move to pump a further $600 billion into markets means China may raise rates, a specter that spooks investors.

Sadly, the G-20, our recently dubbed protector of the global economic order, proved again it’s not up to the job. Its solution to what ails the world looks too Japanese for comfort: all central-bank liquidity, no economic reform or cooperation.

The disparate grouping’s immediate problem is denial. In Seoul, the talk was about more balanced global growth. It was less about how Ireland is burning. Policy makers fiddling and pointing fingers only mean Europe’s debt crisis will worsen.

Its bigger dilemma is the fascinating divide the group’s creation has exposed, with developed nations on one side and developing ones on the other. Fixing that will be harder than today’s leaders realize.

The U.S.-China standoff exemplifies the point. The U.S. wants China to boost the renminbi to correct Washington’s perception of global imbalances. China wants the U.S. to stop swamping the world with debt and devaluing the dollar.

The trouble is, both nations have a point. If China moved rapidly on the renminbi, its economy would get wobbly in a hurry. The U.S. central bank, meanwhile, won’t get the needed traction as it pumps fresh money into credit markets. Cooperation is needed and that will entail the members of the G-20 stomaching some economic setbacks.

Good luck with that. Events in Seoul - and in Yokohama, where the Asia-Pacific Economic Cooperation forum took place over the weekend - reinforced the extent to which leaders are playing to their domestic galleries. Everyone knows the U.S. is borrowing too much, China manipulates its currency and Europe’s fiscal troubles are growing. There’s no political will to cooperate across borders to rectify any of these imbalances.

South Korean President Lee Myung Bak may be a welcome exception. He said any side-effects in global currency markets from the Fed’s latest moves, such as hot-money inflows into Asian economies, were outweighed by the need for faster U.S. growth. It’s true that nothing would do more to help the world right now than a strong U.S. rebound.

Mostly, though, domestic considerations are trumping long-term thinking. Far from joining hands, leaders desperate for legitimacy and social stability are pointing fingers at each other. No one seems ready to prepare their populations for bad news or bitter medicine. It seems inevitable that we are heading into greater crosswinds of protectionism and volatility.

The so-called currency wars are a proxy for this dynamic. Expect a steady increase in the number of capital controls in Asia as more cash zooms toward the region.

Also, expect the U.S. to mull ways to use controls to keep more of the Fed’s liquidity from leaking overseas.

That, in a nutshell, is why investors are so antsy. The sense is that another shoe is about to drop - Europe’s debt crisis, plunging Chinese stocks, any sign of U.S. deflation - in a global economy that’s already very much off-kilter. Amid such uncertainty, it was jaw-dropping in Seoul to see the G-20 act as if Ireland’s troubles are containable.

From that, we can draw two conclusions. One, the global credit crisis never really went away - just underground for a while. Two, there’s too much focus on trade disputes and currency rates and not nearly enough on getting growth to a sustainable level. What good is the odd trade deal when we haven’t finished clearing up the mess from the last crisis?

The irony about gold is that it’s a two-faced financial indicator. Its powerful rally this year shows that investors are going long on anything tangible. Stocks? Bonds? Real estate? Are you kidding? It’s looking a bit too much like grab-a-gun-and-run-for-the-hills time for comfort. Last week’s sudden plunge pointed to another kind of danger: that global elites are in over their heads.

This leadership vacuum is creating even deeper political divides. The G-20 is a wonderful concept in theory, yet it’s not a forum in which real cooperation is occurring. Events in Seoul showed developing nations are sensing that the whole thing is rigged against them.

There’s plenty of blame to go around for this, and the U.S., Europe and Japan must own their share of it before expecting big gestures from poorer nations. Countries like China are wondering why they are being asked for greater reforms than counterparts such as the U.S., and rightfully so.

As this divide widens and self-interest reigns, investor confidence is likely to darken accordingly. To see that, look no further than gold.

*The writer is a Bloomberg News columnist.

By William Pesek
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